The Risky Capital of Emerging Markets – A Long-Run Risk Resolution to the Lucas Paradox
نویسندگان
چکیده
Emerging markets exhibit high returns to capital, the ‘Lucas Paradox,’ alongside volatile growth rate regimes. We investigate the role of long-run risks, i.e., risk due to fluctuations in economic growth rates, in leading to return differentials across countries. We take the perspective of a US investor and outline an empirical strategy to identify risky growth shocks and quantify their implications. Long-run risks account for 60-70% of the observed return disparity between the US and a group of the poorest countries. At the individual country level, our model predicts average returns that are highly correlated with those in the data (0.61). JEL Classification: O4, E22, F21, G12
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